Why Retail Pharmacies Still Overcharge Uninsured Patients—And What That Means for Amazon (rerun)

Consumer Reports recently published a fascinating survey of pharmacies’ cash prices for five common generic drug prescriptions.

The results were startling. Prescription prices ranged from $66 to $1,351—a nearly 2,000% difference. The big three retail drugstore chains—CVS, Walgreens, and Rite Aid—consistently had higher average prices compared with those of other pharmacies. Independent pharmacies had some of the lowest prices, but also some of the highest prices.

Our analysis of prescription profits highlights the pharmacy industry’s unfortunate pricing strategy for cash-pay prescriptions. Average profit margins ranged from $8 to $264 per prescription for the five drugs. We can only hope that consumers didn’t pay the pharmacies’ sky-high cash prices.

The results expose the insane soak-the-poor mentality baked into the U.S. pharmacy industry’s historical pricing models. The data also highlight the potential pharmacy opportunity for Amazon.

P.S. Before other states follow Maryland and pass laws against price gouging by generic manufacturers, perhaps they should take a closer look at the behavior of their own states’ pharmacies. DATA

Consumer Reports’ secret shoppers called 150 pharmacy locations from 25 independent pharmacies, seven national retail chains, at least eight supermarket chains, and one online mail pharmacy (HealthWarehouse.com). They asked for the pharmacies’ retail cash prices for a one-month supply of the following five commonly prescribed generic drugs:

the diabetes drug pioglitazone (generic Actos, 30 mg)

the painkiller celecoxib (generic Celebrex, 200 mg)

the antidepressant duloxetine (generic Cymbalta, 20 mg)

the cholesterol medication atorvastatin (generic Lipitor, 20 mg)

clopidogrel (generic Plavix, 75 mg), a blood thinner

To complement the Consumer Reports data, Drug Channels Institute drew upon National Average Drug Acquisition Cost (NADAC) data. DCI computed the average invoiced acquisition cost for these five products. I used data from January 2018 to correspond roughly to the Consumer Reports survey time frame. For details on NADAC and other acquisition cost data, see section 8.4 of our 2018 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers.

Note that NADAC overstates a pharmacy’s actual net acquisition costs. That’s because NADAC surveys exclude off-invoice discounts, rebates, and price concessions. The excluded amounts could include volume-based rebates from wholesalers, buying groups, and manufacturers. These off-invoice discounts supplement a pharmacy’s negotiated invoice discounts, which can be substantial for multisource generic drugs. Therefore, the profit figures below are likely even higher than those from our computations.

PICK A NUMBER

The table below, which appears in the original article, shows the median discounted retail prices that pharmacies quoted for a one-month supply of each prescription.

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As you can see, cash prices varied wildly among pharmacies. The basket of five prescriptions ranged from $66 to $1,351—a 20-fold difference. On average, the chain drugstores had prices higher than those of both independent pharmacies and pharmacies located in supermarkets and mass merchants.

These figures also put foolish state laws into context. For instance, Maryland passed a law that prohibited a “[a] manufacturer or wholesale distributor” from “engag[ing] in price gouging in the sale of an essential off-patent or generic drug.” (See House Bill 631.) Last week, the law was ruled to be unconstitutional. The Consumer Reports data suggest that Maryland’s lawmakers may have been looking in the wrong place for so-called gouging.

RICH PROFITS FROM THE POOR

Our analysis shows that pharmacy profits could be astronomical for drugs purchased at the pharmacies’ cash prices.

For a 30 day supply of the 5 drugs shown in the table above, a retail pharmacy’s average invoiced acquisition cost (based on NADAC) was about $28. The table below shows the average gross profit per prescription for the five drugs at the reported cash price.

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For example, the typical independent pharmacy earned $79 in average total gross profits from filling these five prescriptions. That’s about $16 per prescription and would provide a healthy profit margin for the pharmacy.

However, the highest prices quoted at an independent pharmacy were $1,351. That suggests total gross profits of $1,323, or about $265 per prescription.

I hope few consumers paid these ridiculous prices. But is it any wonder that people complain about “high drug prices” even when the pharmacy’s actual cost is very low?

THE WARPED LOGIC OF PHARMACY PRICING

Some prescriptions have no third-party payments, because patients pay the full cost out of their pocket. Patients buy these prescriptions at a pharmacy's usual and customary (U&C) retail list price—the price that a pharmacy charges to a cash-paying consumer.

A third-party payer will not reimburse a pharmacy above the pharmacy's U&C list price. Consequently, pharmacies typically establish U&C prices that exceed the maximum expected reimbursement from any payer. In doing so, the pharmacy eliminates the risk that it could be reimbursed an amount less than what a third-party payer would have been willing to pay.

Hence, CVS set its average cash price at $928 for the five prescriptions surveyed by Consumer Reports. That’s at least 33 times higher than the published acquisition cost. As the largest buyer of generic drugs, CVS has an acquisition cost that was likely even lower.

Cash-pay prescriptions now account for less than 8% of the total U.S. market. That equates to more than 400 million 30-day equivalent prescriptions. Per May’s A Reality Check on Amazon’s Pharmacy Ambitions, fulfillment of low-cost generics would therefore be the most logical place for Amazon to enter the market. The excessive profits shown above illustrate why retail pharmacies would be vulnerable to an Amazon attack.

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